Long walk to innovation

South Africa has been slow to innovate. That may be changing

SOUTH AFRICA likes to think of itself as punching above its weight, in business as in everything else. It styles itself as the S in the emerging world's BRICS club, despite being a fraction of the size of the four original members. It is also home to a striking number of global companies. In the Boston Consulting Group's list of 40 fast-growing “African champions” with global ambitions, South Africa led with 18 companies followed by Egypt with seven and Morocco with six.

The country's business scene has changed beyond recognition since apartheid was dismantled. In 1994 South Africa was a siege economy dominated by a few huge conglomerates. Today it has opened up, the conglomerates have slimmed and a host of new companies, particularly in mobile technology, have exploded onto the scene. But the country has been slow to contribute to the wave of innovation coming from emerging markets, led by firms adapting their business models to local circumstances and their products to the preferences of frugal consumers.

There are good reasons for this. The wall between the first and third worlds is higher in South Africa than it is in many other countries, topped with razor wire and patrolled by armed security guards. Businesspeople in Sandton, Johannesburg's rising business district, can live in much the same way as they would in Los Angeles, blind to life in Soweto just 18 miles (30km) away. The governing African National Congress (ANC), with its signature policy of black economic empowerment, is fixated on redistributing wealth rather than creating it. And history weighs heavily on the minds of blacks and whites alike. Most emerging-market countries, even those with horrific pasts like China and Vietnam, have embraced the future. The beloved country dwells on the past to an unhealthy degree.

There are signs that this is changing. South Africa is being shaken up by the rise of the emerging world, as its champions invade South Africa and South African champions return the compliment. The Industrial and Commercial Bank of China brought 20% of Standard Bank in 2007, in what was the country's biggest foreign investment. Indian conglomerates such as Tata and drugs firms such as Ranbaxy are hyperactive in South Africa. South Africa's FirstRand is bringing its banking skills to India. SABMiller has bought one of Colombia's largest brewers, Bavaria. This growing “south-south” trade is forcing South African companies to think about costs as never before: Tata's trucks, which use parts made in India, are 15-20% cheaper than other locally assembled models. South Africa is littered with Chinese wholesalers selling cheap Chinese brands. And it is opening minds to the huge opportunities that lie in the emerging world.

South African companies are paying much more attention to the rest of the continent, which some once made a habit of ignoring. MTN controls half of the Nigerian telecoms market, which is doubling in size every year. Shoprite is Africa's largest food retailer, operating in 18 African countries. South African companies are also discovering the “bottom of the pyramid” in their own country. Several companies have pioneered the art of using cell phones to map the distribution of informal shops (spaza) and truck stops. Blue Label Telecoms, which sells pre-paid tokens, has blazed a trail in forming relationships with tribal chiefs and popular gospel singers to help sell its products. Knowledge of the bottom of the pyramid is now being used to expand in emerging markets. SABMiller produces beer for Uganda using cheap local ingredients rather than expensive imported malt. MTN provides solar-powered phones to fishermen.

South Africa is also discovering that it can turn its dual nature—a first-world and a third-world country living side by side—to its advantage. It can act as a broker between the rich world and the emerging world. Caterpillar and Microsoft teamed up with South African companies (Barloworld and Blueworld respectively) to improve their distribution systems into markets they might otherwise not be able to reach. Both sets of partners are learning lessons from this. South African banks are taking Kenya's mobile-banking system (which uses mobile phones as electronic wallets) and rejigging it for Western consumers who are more worried about security than a lack of access to banks: you can use cell phones to deposit money and to freeze bank accounts. It can also help to solve the continent's most pressing problem, talent shortages, by acting as a halfway house for members of the African diaspora: African professionals who might think twice about accepting a posting in Lagos might well accept one in Johannesburg.

Stagnation and radicalism

Yet the mood in the South African business world is as dark as it has been for years. Growth has slowed to 1.3%, in part because of global trends but also because of political uncertainty. Unemployment is more than 25% and not a single net job has been added since the end of apartheid. Inequality is higher than anywhere else in the world. Economic stagnation leads to political radicalism. The ANC Youth League makes ever more aggressive noises against the white minority. Though the ANC leadership is disciplining it, the league talks about nationalising the commanding heights of the economy and weakening land rights.

Emerging-market innovation offers the best way to break this growing impasse. The ANC needs to realise that its view of business is decades out of date: many of the world's most successful companies are prospering precisely because they have learned to cater for people at the bottom of the pile. If both sides think a bit more about innovation and a bit less about reliving past nightmares, South Africa may actually be regarded by investors as a genuine member of the BRICS club.

Correction: An earlier version of this article mis-spelt Colombia as "Columbia". This was corrected on September 12th 2011.